Bank Lending Cycle and Time-Varying Risk Premiums

2015-09-22 10:40:48

by Heungju Park

Thursday, September 17, 2015 | 12:30pm – 1:30pm | Room 763, HSBC Business School Building

Abstract

We examine the roles played by bank lending cycle in predicting U.S. stock returns. Using a cycle component of U.S. commercial and industrial (C&I) loans, we find that the cycle component is a strong predictor of U.S. aggregate stock returns. Empirically, a fall in C&I loans predicts higher future stock returns. It is robust to a host of consistency checks including in-sample and out-of-sample forecasting tests. Moreover, we find that the aggregate stock returns respond more strongly to the cycle components during credit tightening periods and the stock returns of firms that primarily relied on banks for capital is more sensitive to the cycle components.

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